Findings

You didn't build that

August 09, 2017

Abstract:The comparative advantage of countries evolves over time, yet firms do not continuously adapt their production structure to this evolution. This slow adaptation may be due to high adjustment costs, such as those associated with the disposal of existing physical capital. In practice, these costs may explain why we observe that countries export goods at both ends of the comparative advantage spectrum. This article investigates what happens if the cost of adjusting to the dynamics of comparative advantage is unexpectedly reduced. We use hurricanes to evaluate whether a negative exogenous shock to firms' physical capital leads to a reorganization of exports towards comparative advantage industries. Using a panel of 46 countries and 4-digit industries over the period 1980-2000, we show that the effect of hurricanes on exports is monotonically increasing in comparative advantage. Specifically, export levels drop for industries with a low comparative advantage and grow for industries with a high comparative advantage. Our results also indicate that the process of shifting resources towards higher comparative advantage industries intensifies within the three years following the shock. These findings suggest that if the opportunity cost of adjustment decreases, firms tend to build back better and move up the spectrum of comparative advantage.

Abstract:China's rapid rise in the global economy following its 2001 WTO entry has raised questions about its economic impact on the rest of the world. In this paper, we focus on the U.S. market and potential consumer benefits. We find that the China trade shock reduced the U.S. manufacturing price index by 7.6 percent between 2000 and 2006. In principle, this consumer welfare gain could be driven by two distinct policy changes that occurred with WTO entry. The first, which has received much attention in the literature, is the U.S. granting permanent normal trade relations (PNTR) to China. A second, new channel we identify is China reducing its own input tariffs. Our results show that China's lower input tariffs increased its imported inputs, boosting Chinese firms' productivity and their export values and varieties. Lower input tariffs also reduced Chinese export prices to the U.S. market. In contrast, PNTR had no effect on Chinese productivity nor export prices, but did increase Chinese entry into the U.S. export market. We find that at least two-thirds of the China WTO effect on the U.S. price index of manufactured goods was through China lowering its own tariffs on intermediate inputs.

Abstract:Despite prominent and compelling theoretical arguments linking manufacturing imports from the global South to rising income inequality in the global North, the literature has produced decidedly mixed support for such arguments. We explain this mixed support by introducing intervening processes at the global and national levels. At the global level, evolving characteristics of global production networks (GPNs) amplify the effect of Southern imports. At the national level, wage coordination and welfare state generosity counteract the mechanisms by which Southern imports increase inequality, and thereby mitigate their effects. We conduct a time-series cross-section regression analyses of income inequality among eighteen advanced capitalist countries to test these propositions. Our analysis addresses alternative explanations, as well as validity threats related to model specification, sample composition, and measurement. We find substantial variation in the effect of Southern imports across global and national contexts. Southern imports have no systematic effect on income inequality until the magnitude of GPN activity surpasses its world-historical average, or in states with above-average levels of wage coordination and welfare state generosity. With counterfactual analyses, we show that Southern imports would have led to much different inequality trajectories in the North if there were fewer GPNs, and if the prevailing degrees of wage coordination and welfare state generosity were higher. The countervailing effects of GPNs and institutional context call for theories of inequality at the intersection of the global and the national, and raise important questions about distributional politics in the years to come.

Abstract:The European Commission has often used its merger-review power to challenge high-profile acquisitions involving non-EU companies, giving rise to concerns that its competition authority has evolved into a powerful tool for industrial policy. The Commission has been accused of deliberately targeting foreign - especially American - acquirers, while facilitating the creation of European national champions. These concerns, however, rest on a few famous anecdotes. In this Article, we introduce a unique dataset that allows us to provide the first rigorous examination of these claims. Our analysis of the over 5,000 mergers reported to the Commission between 1990 and 2014 reveals no evidence that the Commission has systematically used its authority to protectionist ends. If anything, our results suggest that the Commission is less likely to challenge transactions involving non-EU acquirers. Our analysis therefore challenges the common notion of European antitrust protectionism and shifts the burden of proof to those advancing this view.

Abstract:Populism may seem like it has come out of nowhere, but it has been on the rise for a while. I argue that economic history and economic theory both provide ample grounds for anticipating that advanced stages of economic globalization would produce a political backlash. While the backlash may have been predictable, the specific form it took was less so. I distinguish between left-wing and right-wing variants of populism, which differ with respect to the societal cleavages that populist politicians highlight. The first has been predominant in Latin America, and the second in Europe. I argue that these different reactions are related to the relative salience of different types of globalization shocks.

Abstract:We hypothesize and find evidence consistent with foreign firms being tax-favored acquirers of U.S. targets with greater locked-out earnings because they can avoid the U.S. tax on repatriations. This effect is economically significant; a standard deviation increase in lockout is associated with a 12% relative increase in the likelihood that an acquirer is foreign. We also find evidence that foreign acquirers of the target firms are more likely to be residents of countries that use territorial tax systems, as the tax advantages for a foreign firm acquiring a U.S. target with locked-out earnings are even greater for these acquirers.

Abstract:While a number of studies have examined the politics of tariff decision-making in the United States, little work has examined the subsequent political effects of tariff policy. We help fill this gap in the literature by analyzing - both theoretically and empirically - the electoral implications of tariff revision. Specifically, we investigate the veracity of the Cannon Thesis - the proposition advanced by Speaker Joe Cannon in 1910 that the majority party in the U.S. House was punished when it made major revisions to the tariff. We find that from 1877 to 1934 major tariff revisions were, on average, associated with a significant loss of votes for majority-party members - both regionally and nationally - that translated into a loss of House seats. We find support for the notion that major tariff revisions generated inordinate uncertainty among various business interests, which the opposition party could then use (by leveraging fear and market instability) to mobilize its base and gain ground in the following election. Our results provide a new explanation for the delegation of tariff policymaking to the executive branch.

Abstract:In a world with increasingly integrated global supply chains, trade policy targeting upstream products has unintended consequences on their downstream industries. In this paper, we examine whether protection granted to intermediate manufacturers leads to petition for protection by their downstream users. We first provide a simple model based on the quantitative framework of Ossa (2014) which identifies the key factors and their interactions that cause cascading protection to motivate our empirical analysis. Then, we test our model by identifying the input-output relationships among the time-varying temporary trade barriers of the US using its detailed input-output tables. As predicted by the theory, we find that measures on imported inputs increase the likelihood of their downstream users' subsequent trade remedy petition over the 1988-2013 period. Moreover, our simulation exercise shows that cascading protection can cause additional welfare losses, and hence we propose that trade policy investigations should take vertical linkages into account.

Abstract:I construct a model in which a colony trades raw materials for manufactures with the mother country and the rest of the world, and can rebel at the cost of some trade disruption with the mother country. Decolonisation is more likely when the rest of the world is more abundant in manufactures, or scarcer in raw materials: this is because trade policy in the rest of the world is more favourable to a rebel colony, while trade policy within the empire is more restrictive. I use my results to explain the timing of the American Revolution, and the Latin American Revolutionary Wars. I discuss some important implications for the history of colonialism.

Abstract:Trade liberalization has reduced trade tax revenue in most less developed countries (LDCs). The options to replace this tax, which has historically been LDCs' primary source of tax revenue, are limited by competitive pressures in the global economy. Using time-series error correction models, we assess how partisan politics shaped the reallocation of taxes in thirty-eight LDCs from 1975 to 2009. We argue that leftist governments have a vested interest in recovering lost revenue to fund spending that benefits their constituencies but they are highly constrained by the market signaling effects of increasing taxes. We find that leftist governments retained higher levels of falling tax revenue and offset trade tax losses with progressive personal income taxes (PITs). Nonetheless, leftist governments appeared reluctant to increase revenue from corporate income or social security taxes, which impose costs on business. To make up for the trade revenue loss, leftists instead relied more heavily on regressive consumption taxes, which are the most lucrative and market-friendly supplements to preferred PIT. Leftist parties in LDCs demonstrate redistributive concerns, but their tools and the lasting effects of their reforms are limited by strong market constraints.

Abstract:Two prominent features in current world affairs are the unprecedented levels of global economic integration and the growing incidence of intrastate violence. The relationship between these two trends has become a source of contention among scholars and practitioners. We develop and test a novel argument linking inward investment to intrastate violence in developing countries. We argue that the activity of multinational corporations affects market dynamics, contributing to rent creation; higher rents, in turn, increase the incentives of rebels to fight for the control of these rents, thereby increasing the likelihood of armed conflict. Testing our hypothesis poses technical challenges as conflict will likely depress investment activity, biasing the estimates downward. To address the endogeneity concern, we adopt an instrumental variable strategy. Using a sample of developing countries from 1970 to 2013, we find strong evidence that inward foreign investment is positively related to civil conflict onset. Moreover, we find that the positive relationship between foreign investment and conflict is not limited to resource-seeking investment. State capacity, on the other hand, mitigates the conflict-enhancing effect of foreign investment. Our findings have important implications for understanding the link between economic interdependence and security.

Pirate's TreasureJenny Lin & William LincolnJournal of International Economics, forthcoming

Abstract:Do countries that improve their protection of intellectual property rights gain access to new product varieties from technologically advanced countries? We build the first comprehensive matched firm level data set on exports and patents using confidential microdata from the US Census to address this question. Across several different estimation approaches we find evidence that these protections affect where US firms export.